Buy vs Build: Exploring the Two Paths to a Bank Charter through Four Case Studies
The debate over whether to build a bank from scratch or acquire an existing charter tends to focus on speed. Buying a charter is assumed to be faster, more flexible, and less encumbered by regulatory friction. Building a de novo bank is often framed as slow, capital-inefficient, and operationally fragile. The truth is, both paths are riddled with speed bumps and potholes, and the proper path to choose depends on the end goals of the investor group.
What ultimately differentiates outcomes is not how quickly a bank can open its doors, but how well its balance sheet, cost structure, and funding model align with the realities of its first five years. The post-2020 environment has been especially unforgiving in this respect. Rapid interest rate changes, deposit competition, and supervisory scrutiny have compressed the margin for error. In that setting, early decisions compound quickly. Going forward, declining interest rates and reduced regulatory scrutiny change the calculus significantly.
The experience of the four banks described below should help inform investor groups in making the best decision for the bank they aim to build. Classic City Bank and Locality Bank started as truly new de novo institutions with fresh charters. They faced a lengthy regulatory approval process but avoided the complications of legacy systems, bad assets, and integrating existing staff. LendingClub Bank and Sonata Bank acquired existing charters and made immediate strategic pivots. They bypassed the application process entirely but inherited their own challenges. All four entered the same macroeconomic environment, yet their financial paths diverged significantly.
Classic City Bank: Disciplined Bankers Hit the Nail on the Head
Classic City Bank opened in Athens, Georgia, in late 2020 by a group of local and experienced founders as a conventional community bank with no existing loan or deposit book, with just $20 million in equity capital. They lost $1.2 million in their first quarter of operation in 2020, followed by a loss of $760 thousand in 2021, before turning profitable in year three with a return on assets (ROA) of 1.03% and an exceptional 1.71% ROA in year four. They achieved this remarkable start by holding non-interest expenses low while scaling up the balance sheet with a diversified loan mix and a focus on low-cost non-maturity deposits.
Expense control is where Classic City really stands apart. Its efficiency ratio settled into the mid-40% range, dramatically outperforming both de novo peers — many of which still exceed 100% — and established community banks that typically operate in the low-60s. Personnel expense and overhead grew slowly relative to assets, allowing scale to work in the bank's favor rather than against it.
Capital followed a similarly disciplined path. Like all de novos, Classic City began with elevated leverage required as part of the bank charter application process. Over time, those ratios normalized toward roughly 11% as assets grew, earnings accumulated, and capital was deployed productively rather than defensively. Classic City's formational costs are not detailed, but, thanks to exceptional profitability, it's likely all formational costs and the losses incurred in years 1 & 2 were recouped by the end of year 3. By measure of retained earnings of $5.1 million, Classic City achieved capital appreciation of 25% in just four years, and their investors can expect annual returns of 10–20% for a long time.
The core lesson from Classic City is that, in a good market, a disciplined and experienced leadership team can quickly recoup the startup costs of a de novo bank. Starting with only $20 million in capital imposed difficult lending limit constraints, but the small team operating in a market they knew well was able to overcome a low lending limit while diversifying the loan book and minimizing loan losses. Classic City is an example of what can be achieved when a de novo bank team executes perfectly, but such execution and circumstances are not always the case.
Locality Bank: The Cost of Complexity in a De Novo
Locality Bank, headquartered in Fort Lauderdale, launched as a de novo bank about a year after Classic City in January 2022, but with a more ambitious operating scope at inception and a larger capital raise of $35 million. Its strategy emphasized a technology-forward brand, broader geographic ambitions within South Florida, and less regard for minimizing operating costs during the scale-up in assets.
In its early years, Locality exhibited the classic de novo loss profile. In their first quarter of operations, they reported a net loss of $2.4 million. By the end of the first year, losses exceeded $4.8 million, and the second and third years remained substantially negative, with losses of $2.3 and $2.4 million, respectively. A loss of $720 thousand through the third quarter of 2025 is an improvement, but still highly disappointing for investors.
Management would surely highlight their growth to $360 million in assets as a success story — nearly twice the growth of Classic City in the first four years. But with 11 Board Members and eight executive officers, management's lack of focus on cost controls should be a major concern for any investor. Indeed, Locality's efficiency ratio of over 80% is nearly double that of Classic City Bank.
A second capital raise of approximately $15 million in Q3 of 2025 boosted capital ratios and primed the bank for further growth despite continued losses. However, an increasing reliance on brokered deposits and borrowed money suggests growth is likely to slow or cause more significant concerns from regulators. Commercial real estate accounts for over 430% of capital, and over half of that is of the higher-risk, non-owner-occupied variety. Locality's experience underscores an important point: when operational ambition outruns early scale, a de novo can experience staggering losses — over $10 million in Locality's case — before reaching profitability.
Sonata Bank: A Novel Experiment Backfires
Sonata Bank represents a very different experiment. Rather than build from scratch, its organizers acquired the charter of a small legacy institution in Kentucky with just $22 million in assets in August of 2022. They recapitalized the bank with a $17 million equity injection and pivoted rapidly toward a new growth strategy as a 'digital-first' community bank focused on commercial lending to Quick Service Restaurants (QSRs).
With an acquisition, there is no de novo period of heightened regulatory scrutiny, and existing deposits, loans, and the operating team are all assumed. However, in this case, the new ownership replaced the team, relocated the headquarters from rural Sebree, Kentucky, to a wealthy Nashville suburb, and sought out new loans and depositors. The appeal of this approach was speed. But the hidden costs were almost immediately evident.
In the first three years since the acquisition, growth has been exceptional, but costly. Sonata has grown to $256 million in assets, but generated losses that nearly equaled the initial recapitalization. Additional capital injections of $6 million in 2023, $8 million in 2024, and $4.6 million through September of 2025 were necessary to absorb those losses and support further growth. The bank will post a loss in 2025 as well, but finally reached quarterly profitability with income of $30 thousand in September. The efficiency ratio of 124% indicates management anticipates significantly more scaling.
Sonata Bank demonstrates the potential pitfalls of purchasing a bank charter rather than applying for a new one and emphasizing rapid growth over rapid profitability. Due to bloated non-interest expenses, mainly personnel and office expansions, large operating losses in each year since the recapitalization have likely tested investors' resolve. Despite an experienced organizing team, this experiment has cost investors dearly.
LendingClub Bank: Scale Makes the Charter Worth Buying
LendingClub was an established non-bank lender that acquired the charter of Radius Bank (total assets of $2.4 billion) in February 2021, immediately transforming itself from a marketplace lender reliant on third-party funding into a regulated deposit-taking institution with balance-sheet leverage. Unlike Sonata Bank, this was not a small-bank pivot funded by a modest recapitalization. LendingClub entered the transaction with scale, technology, and capital, and the results reflect that difference immediately.
From a profitability standpoint, LendingClub Bank never followed the typical de novo loss curve. By 2022, the bank was already solidly profitable, posting two consecutive years of ROA over 2%. The cost of funds has since increased and caused the ROA to fall more in line with peers at 1.19% through September 2025. These returns materially exceed those of most community banks and are far superior to the early-year performance of both de novo banks and smaller charter acquisitions.
LendingClub reported an exceptionally high net interest margin throughout the period, peaking above 8% in 2021, settling into the mid-6% range in 2022–2023, and remaining above 5% even as deposit costs rose in 2024–2025. While this margin benefited from a rising-rate environment, it also reflects the economics of unsecured consumer lending funded with internet-sourced retail deposits rather than wholesale borrowings. The leverage ratio consistently exceeded 10%, and this stability allowed for a hefty $50 million dividend on $93 million of income through Q3 2025.
LendingClub Bank demonstrates the conditions under which buying a charter makes economic sense. When an acquiring group brings scale, proven underwriting, diversified revenue, and sufficient capital, a charter can immediately improve funding economics and profitability. However, those benefits are not inherent to the charter itself — they are the result of alignment between business model and balance sheet. Without that platform, the same charter would have looked far less impressive.
What These Four Banks Reveal
There is no guaranteed path to success with either strategy. Both require experienced teams, adequate capital, realistic business plans, and the temperament to endure early losses without panicking into bad decisions. But the environment for de novo banks has certainly shifted. Even established players like PayPal, Edward Jones, and Affirm are opting for new bank charters rather than purchasing a charter. Meanwhile, a backlog of traditional bank models from Roswell, GA to Verona, NJ are receiving relatively quick approvals.
A faster, more transparent application process reduces the carrying cost of pre-opening expenses, shortens the timeline to revenue generation, and reduces the uncertainty that has historically made de novo banking unattractive to investors. Neither path guarantees success, but, for the first time in nearly two decades, consensus seems to agree that the best path to a bank charter is to start from scratch.
Originally published on Substack ↗